Civil Money Penalties and the Use of the Civil Money Penalty Assessment Matrix

Background

The Board has historically reserved the use of its authority
to assess civil money penalties for egregious or repetitive
violations of law and for instances where other informal and
formal enforcement tools, such as memoranda of understanding,
written agreements, and cease and desist orders, failed to yield
correction due to the purposeful actions of individuals or
financial institutions. However, the changing climate of bank
supervision and regulation that has resulted from the lessons
learned from the savings and loan crisis has placed a new
emphasis on examining the activities of individuals who manage
and direct the affairs of financial institutions. There now
appears to be a clear consensus among regulators that if civil
money penalties are assessed against individuals associated with
insider abuse or the repetitive lack of compliance with banking
laws, they will have a deterrent effect and, thus, keep small
problems from becoming larger ones.

With the passage of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), Congress
endorsed the aforementioned view and greatly expanded the Board's
authority to assess civil money penalties to include assessment
for the violation of: (1) any law, rule or regulation; (2) a
final or temporary order, including a cease and desist,
suspension, removal, or prohibition order; (3) a condition
imposed in writing in connection with the granting of approval of
any application or other request; and (4) a written agreement.
Civil money penalties may also now be assessed, under FIRREA, for
recklessly engaging in an unsafe or unsound practice or a breach
of fiduciary duty that results in loss to the institution or gain
to the individual. In addition, FIRREA expanded the Board's
authority to assess penalties against any "institution-affiliated
party," including any officer, director, employee, controlling
stockholder, agent, and any shareholder who participates in the
conduct of the affairs of the institution, as well as any
independent contractor (including any attorney, appraiser, or
accountant) who knowingly or recklessly participates in a law or
regulation violation or unsafe or unsound practice that causes
more than a minimal financial loss to the institution.

FIRREA not only significantly expanded the Board's authority
to assess penalties, it also increased the dollar amount of
penalties. The standard $1,000 per day penalty was replaced by a
new three-tiered framework. A first-tier penalty of up to $5,000
per day may be assessed for any violation of law, rule or
regulation, final order, condition imposed in writing or written
agreement. A second-tier fine of up to $25,000 per day may be
assessed for any violation of law or regulation or for any
reckless unsafe or unsound practice or for a breach of fiduciary
duty that has caused loss to the institution or gain to the
individual. A third-tier fine of up to $1,000,000 per day may be
assessed for any knowing or reckless violation of law or
regulation, participation in an unsafe or unsound practice or
breach of fiduciary that causes substantial loss to the
institution or gain to the individual.

In addition, the Board may assess fines of up to $25,000 per
day for any violation of the Bank Holding Company Act of 1956, as
amended, and may assess fines ranging from $2,000 per day to
$1,000,000 per day for failure to make, submit or publish
required regulatory reports or for the filing of false or
misleading reports (e.g., Call Reports and FR Forms Y-6 and Y-9).

Last year, an interagency civil money penalty working group
(the "CMP Working Group"), comprised of enforcement staff
attorneys from the OCC, FDIC, OTS, Farm Credit Administration and
Board, was formed to develop uniform and consistent policies for
the assessment of civil money penalties. Noting the increased
use of civil money penalties by the banking agencies and
anticipating a further increase, the CMP Working Group sought a
means to ensure that in assessing penalties, the five statutory
factors1 and the 13 Federal Financial Examination Council
factors (the "FFIEC Factors")2 would be consistently applied not
only among the agencies but, also, within each agency. As a
result, the CMP Working Group developed a model civil money
penalty matrix to provide for consistency. This matrix was based
largely on the one in use by the OCC since 1988. Each agency
then modified the model matrix for the particular and unique
types of actions for which it had authority to assess a civil
money penalty.3 The Federal Reserve matrix, which is described
below, very closely follows the interagency model.

The Civil Money Penalty Assessment Matrix

The attached Civil Money Penalty Assessment Matrix
(the "CMP Matrix") condenses the five statutory factors and the
13 FFIEC Factors into 11 factors, each with an assigned weight.4
Mitigating factors are also separately incorporated and assigned
weights. Certain factors, such as loss and concealment, carry
higher weights. The CMP Matrix also takes into account the
seriousness or frequency of each violation or unsafe or unsound
practice by providing a multiplier for each factor, ranging
from 0 to 5, based on severity. On the CMP Matrix, each factor
is listed in the left column, its weight factor is listed in the
right column, and the multiplier is listed across the top. For
example, to find the total point value for concealment in a
particular case, locate the "concealment" factor, note that it
carries a weight of 5, and multiply it by a number from 0 to 5
depending on the level of concealment. The total point value for
concealment would range from 0 for no concealment to 20 for
active concealment.

In analyzing an activity that could give rise to a civil
money penalty assessment, after each of the factors has been
assigned its point value, the points are totaled for a
preliminary figure. Mitigating factors, such as restitution,
good faith, and full cooperation, are then considered on a
weighted basis and the mitigating factors point total is
subtracted from the preliminary figure. This final figure is
then measured against the attached "Suggested Scale of Civil
Money Penalty Amounts" to serve as a guide in determining the
amount of the penalty.

We note that the CMP Working Group also considered adding
other factors to its proposed matrix. These included: the
financial resources of the individual or institution, the dollar
amount of personal gain received by the individual as a result of
a violation and whether a violation reaches the level of tier-two
(up to $25,000 per day) or tier-three (up to $1,000,000 per day).
After considerable work and discussion, it was decided that these
could not be reduced to the same type of forumla as the other
factors. Therefore, these factors must be considered separately
before setting the final penalty amount.

Board procedures require that before the setting of any
final penalty amount, the parties to be assessed be offered the
opportunity to provide Board staff with any evidence, including
financial factors, that would either weigh against assessment or
mitigate the amount of the proposed penalty. The Board's General
Counsel sends the parties letters advising them of Board staff's
intent to recommend a penalty and inviting them to offer any
mitigating evidence. The responses to these letters are
evaluated and considered, along with the final figure from the
CMP Matrix, by Federal Reserve Bank and Board staffs in
determining the final penalty amount that will be presented for
negotiations with the parties and their counsels.

Starting immediately, the staffs of the Federal Reserve
Banks and the Board should begin using the CMP Matrix in
connection with their evaluation of each proposed civil money
penalty assessment action. It is most important to note,
however, that because the facts and circumstances of each penalty
case are different, the assessment of a civil money fine cannot
be completely reduced to the mechanical application of a formula
or purely numerical index. The exercise of judgment based on
expertise and experience is important and necessary.

In the event that you have any questions concerning any of
the matters described herein, please contact me at 202-452-2620.

Herbert A. Biern
Assistant Director

ATTACHMENTS TRANSMITTED ELECTRONICALLY BELOW

CMP MATRIX

Note: Boxes on the Matrix (including the empty boxes) should be used to reflect progressive levels of severity.

0

1

2

3

4

WeightFactor

FinalFigure

Intent

No

Should Have Known

Clear Intent

5

Pecuniary gain or other benefit to IAP
or Related Interest

No

Indirect Benfit to IAP or Related Interest

Direct Benefit to IAP or Related Interest

4

Prev. Admin. Action or Criticism

None

Prev. Criticism for Similar Violation

Violation or Criticism on Point Cited in Report

Prior Letter or MOU on Point

C&D, Agreement, or Condition in Writing on
Point

3

History

None

Unrelated Prior Violations

At Least One Similar Violation

Several Similar Violations

Frequent Similar Violations

2

Loss or Risk of Loss

No Loss and No Risk of Loss

No Loss or Minimal Risk

Minimal Loss or Moderate Risk

Substantial Actual or Potential Loss

6

Number of Violations at Issue

Numerous Violations

2

Duration of Violation Prior to
Notification

Violation Outstanding for Long Period

2

Continuation after Notification

Violation Ceased Prior to Notification

Violation Ceased Immed. Upon Notification

Violation Continued for Period of Time After Notification

Violation still Continuing

3

Concealment

None

Purposely Complicated Transaction to Make It Difficult to Uncover

Active Concealment

5

Impact

No Impact on Institution or Banking Industry

Substantial Impact on Institution; No Impact on
Banking Industry

Moderate Impact on Banking Industry or on Public
Perception of Banking Industry

Substantial Impact on Banking Industry or on Public
Perception of Banking Industry

6

Loss or Harm to Consumers (where
applicable)

No Loss and No Harm

No Loss or Minimal Harm

Minimal Loss or Moderate Harm

Substantial Loss or Harm

5

Subtotal 1

Restitution

No Restitution

Complete Restitution Under Compulsion (e.g. Threat of
Losing Job)

Partial Restitution

Complete Restitute Immed. After Loss or Violation
Brought to Attention

These suggested amounts are for tier 1 penalties. Facts and circumstances, as well as pertinent legal considerations, may warrant the use of tier 2 or tier 3 penalties.

The amount of pecuniary gain that the party received as a result of the violation may increase the amount of the penalty assessed beyond the range set forth herein as long as the total penalty remains within the maximum statutory amount.

The amount of the penalty may be mitigated by the financial resources of the party assessed.

Footnotes

1. The five statutory factors that the Board must consider in determining the amount of a civil money penalty assessment are: the financial resources of the party, the good faith of the party, the gravity of the violation, the history of previous violations, and other factors as justice may require. (See, generally, 12 U.S.C. 1818(i)(2)(G)). Return to text

2. In 1980, the Board and the other financial regulatory agencies adopted an Interagency Policy Regarding the Assessment of Civil Money Penalties. This policy set out 13 regulatory factors that should be considered in determining if a civil money penalty is warranted. Many of the factors paralleled the five statutory factors. Other FFIEC Factors included: evidence of concealment, actual loss to the institution or gain to the party committing the violation, and evidence of restitution. We note that the members of the FFIEC are revising the 1980 policy to conform to FIRREA. The proposed revisions are minor and have been considered in connection with this action. Return to text

3. For example, only the Federal Reserve can assess fines against bank holding companies and their institution-affiliated parties. Return to text

4. We note that the CMP Matrix does not eliminate the need for the Board to follow the statutory factors, which are mandated by law, and the FFIEC Factors. The CMP Matrix merely facilitates compliance with the statutory and FFIEC Factors. Return to text